For personal use only. Company Presentation. Review of Half Year FY Rory J F Macleod Managing Director

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1 Company Presentation Review of Half Year FY 2015 Rory J F Macleod Managing Director 1

2 Important Information This presentation dated March 2015 provides additional comment on the market release of 27 th February 2015 and the Half Year Report. As such, it should be read in conjunction with, and subject to, the explanations and views in those documents. This presentation is provided for information purposes only. The information contained in this presentation is not intended to be relied upon as advice to investors and does not take into account the investment objectives, financial situation or needs of any particular investor. Investors should assess their own individual financial circumstances and consider talking to a financial adviser or consultant before making any investment decision. Certain statements in this presentation constitute forward looking statements. Such forward looking statements involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of the Company and which may cause actual results, performance or achievements to differ materially from those expressed or implied by such statements. While all reasonable care has been taken in relation to the preparation of this presentation, none of the Company, its subsidiaries, or their respective directors, officers, employees, contractors or agents accepts responsibility for any loss or damage resulting from the use of or reliance on the presentation by any person. Past performance is not indicative of future performance and no guarantee of future returns is implied or given. Some of the information in this presentation is based on unaudited financial data which may be subject to change. All values are expressed in Australian currency unless otherwise stated. All intellectual property, proprietary and other rights and interests in this presentation are owned by the Company. 2

3 Making Food Better We believe that people s needs have moved towards safer, nutrient rich, longer life convenient foods. All our products have a purpose of bringing value to consumers lives through best nutrition and innovative convenience 3

4 A Company well positioned to meet Global Trends 4

5 Our Company will be a leader in Value Adding Australia s Unique Food Capabilities Premium Allergen Free Non GMO Grains Global Application Value Added Long Life Dairy Value Added Long Life Food & Beverage

6 Critical Paddock to Plate Process A sustainable export model needs to be based on a Paddock to Plate Process Paddock to Plate, Quality Assurance Source Manufacturing Branding

7 Source Australian Source It s is our only basis to Guarantee to our customers, Quality, Consistency, Supply Chain Transparency, Innovation, and Guarantee of Non GMO We are building dedicated supply relationships with Farmers to ensure growth and quality Dairy Grains 7

8 Manufacturing, Innovation Platform New Plants New Capacities R&D Innovation Dairy Shepparton Non Dairy Ingleburn Cereal, Snacks UHT capabilities Cereal, Snacks UHT Dairy, Non Dairy Building Low Cost High Quality Capabilities to drive Growth 8

9 Proving Capability with Strong Partners in Key Markets China and SE Asia North America Global Supply Partners Australia 9

10 Overview of Half Year

11 A very successful first half investing in the Company s capability and capacities for profitable growth consistent with its 3 year plan 11

12 Some of our Achievements in the Period 12

13 Highlights Commissioning of a state of the art Cereal based Nutritional Snack line 3 months ahead of plan, with launch of innovative nutritional snacks into the mainstream aisle commencing in January 2015 Sales growth in Cereals in Australia and North America, reflecting growth in category and increased distribution Sales growth in non-dairy beverage, led by growth in branded and non-branded sales in the fast growing Almond Milk category Preparation for the launch of the Australia s Own Brand in China, in partnership with Shenzhen JLL, which occurred in February 2015 Highly successful launch of Pactum Dairy Group (PDG) achieving sales of approximately $30 million in its first full half, tracking well ahead of its year 3 business plan with strong demand from customers from China, SE Asia and Australia. Capital expenditure plans have now been accelerated to meet this demand Launch of new and differentiated packaging for the Brunswick Specialty Seafood brand to consolidate its leadership position 13

14 Financial Summary Half Year to Dec FY 2015 Group Net sales growth of 66% to $85.5million (includes PDG and pre consolidation elimination) The Company reported a Net profit of $55.2 million, a material increase from the prior corresponding period. The Net Profit included a post-tax fair value gain of $52.2 million from the gain on reclassification of the a2 Milk Company investment. Operating EBDITA of $6.3 million (including interest from Associates), a marginal decrease of 1.4% on the previous corresponding period, reflecting increased sales in all business units, with profitability impacted by commissioning of the new nutritional snack equipment reducing manufacturing recoveries and gross margin during the half. UHT operations and Specialty Seafood performed ahead of the prior year. As in any major expansion or reshaping of a business, not all matters proceed to plan. This is reflected in our slightly lower operating profit from our Cereals and Snacks operations for 1 st half FY. At the same time, the effort from our business to achieve the outcomes detailed in this release has been outstanding. 14

15 Sales Revenues Development Group Net Sales 6 Months to 31 December +2% + 94% + 10% + 66% Record Net Sales for Group of $85 million including Dairy, + 66% on prior year period Net Sales (100% owned entities) of $55.5 million, +7.5% on prior year period Key Revenue Drivers Commencing Dairy Sales into China, SE Asia Growth in Cereal sales in Australia and North America Growth in Non Dairy Beverage including Branded and Private Label 0 FY 10 FY 11 FY 12 FY 13 FY 14 Net Sales include PDG 100% sales, intercompany sales 15

16 Operating Earnings 6 Months to 31st December FY 15 FY 14 Movement Freedom Foods Australia 2,512 3,535-1,023 Freedom Foods North America Pactum Non Dairy 4,258 3, Specialty Foods 1,337 1, Other Group Services -1,978-1, Elimimination Non Operating EBDITA 6,319 6, Margins FY 15 FY 14 Freedom Foods Australia 10.7% 15.9% Pactum Non Dairy 17.1% 15.9% Specialty Foods 20.5% 19.5% Total 11.4% 12.4% Freedom sales growth, offset at contribution level by impacts of commissioning at Leeton and run out of old formats, products Pactum Non Dairy increased sales, margin and contribution through mix shift to higher value added Specialty Foods increased sales and contribution through growth in share and operational focus Pactum Dairy achieved profitability during the later months of its first full half. 16

17 A2 Milk Company Gain on Investment During the period, the Company reclassified how it accounts for the investment in a2mc. This resulted from the resignation of Mr P R Gunner from the a2mc Board in November 2014 and the determination by the Group that it no longer was able to clearly demonstrate that it exercised significant influence over a2mc. Significant influence was deemed to be lost at the conclusion of the a2mc AGM and therefore on this date the group has reclassified the investment to an Available for Sale investment (AFS) under the requirements of AASB 139 Financial Instruments: Recognition and Measurement. At the date of reclassification, a fair value gain of $53.1 million ($52.2 million net of tax) was recorded in the statement of profit or loss. The investment in a2mc continues to be recorded at fair value, with any gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated in the investments revaluation reserve. The Company did not recognise any equity accounted profit from a2mc during the period. 17

18 Financial Summary Half Year FY Months to 31 st December 2014 $ $ 000 % Change Gross Sales Revenues (Including PDG) 93,231 59, % Gross Sales Revenues 63,231 59, % Net Sales Revenues (Including PDG) 85,528 51, % Net Sales Revenues 55,528 51, % EBDITA (Operating) (Note) 6,319 6, %% EBITA (Operating) (Note) 4,777 5, % Net Profit (Operating) 3,102 3, % Net Profit (Reported) 55,190 3, % Total Ordinary Dividend (cps) $0.015 $0.015 NA EPS (cents per share)( Fully Diluted for CRPS) % Net Debt / Equity (including financial assets) 6.1% NA Net Debt / Equity (excluding financial assets) 14.3% NA Net Assets per Share $1.16 $ % Net Tangible Assets per Share $1.02 $ % Notes: Gross Sales Revenues does not include revenues from group associate entities, PDG or A2M. Net Sales Revenues in the table above differs from the Appendix 4E, as the above sales includes Pactum sales to Freedom Foods and Freedom to Freedo m North America, which is eliminated under consolidation accounting practice, but recognised by the Group as revenue, given the businesses sell at arm s length. Operating EBDITA and EBITA, excludes pre-tax abnormal or non-operating charges with an add back of non cash employee share option expense. 18

19 Cereal and Cereal Snacks Freedom Foods continued to build momentum in its Cereal and Cereal based Snacks portfolio, with material investments in production capacity and capabilities for future growth. Significant capital expenditure occurred at Leeton, together with further investment in R&D and an increase in brand marketing. The business delivered overall gross sales growth of 10% compared to the previous corresponding period. Reduction in non-core categories including biscuits had an impact on sales and margins in the period As well as increased marketing investment in building awareness of the brand, we are focussed on driving our innovation pipeline to meet the broader consumer market. A significant achievement to date from our R&D focus has been our range of products achieving star ratings within the government health star rating system. The business developed its Freedom Farmer platform, with a number of key farmer groups engaged to build the Group s grains supply platform over the coming years. This will guarantee the integrated paddock to plate provider. Australian sourcing of all ingredients is a key source of competitive advantage for the Company. 19

20 New Cereal Packaging and Reconfiguration Launch February 2015 Freedom Cereals ranging from 5 Stars to 3.5 Stars 20

21 Cereals and Cereal Snacks Capacity Investment During the half, the business invested $9 million in capital expenditure at Leeton, including completing the upgrade of Cereal extrusion and packaging capabilities to improve efficiencies and provide increased capacity in range and format for both Cereals and Cereal Snacks. A significant part of the half year expenditure was incurred on the installation of a new state of the art automated nutritional snack line. Both these investments will significantly increase Freedom Foods production capability, with no material increase in cash overheads and a lower cost per case once completed. 21

22 Nut Free Snacks Launch into Mainstream A successful launch of the first high rating nut free nutritional snack range into mainstream supermarkets occurred in January The requirement to bring forward the commissioning timeline of the new nutritional snack bar line at Leeton had an impact on manufacturing recoveries and gross margin during the half. The launch will have a material impact on sales growth in the year from the expansion of distribution and product range. Our expanded capability will ensure the business can meet consumer demand for convenient snacking occasions in Australia, North America and Asia. 22

23 Initial Range Launch January

24 Media Launch February

25 Cereals and Cereal Snacks North America In North America, our 80% owned subsidiary invested in building sales and distribution capabilities, increasing sales and store distribution within the Specialty and Natural Product Retailer markets. Considerable investment has been made in developing relationships with retailers including Sprouts, Whole Foods, Wegmens, Kroger and HEB. We will continue to build distribution and consumer awareness within existing and new retail stores, reflecting our unique proposition in Allergen Free and Non GMO Cereals and Cereal Snacks. This includes new product launches in Cereal within the children s segment and plans for launch of a range of Allergen Free nutritional snack bars in The business will look to significantly expand distribution over the medium term through the application of additional sales and marketing resource. The Group is also considering options for increased scale in the North American market. 25

26 USA Retailer Presence 26

27 Cereals and Cereal Snacks Outlook The focus for the business into 2015 and beyond is on increasing sales in Australia through building on its category leadership in the health channel and further growth in distribution channels, while establishing key products, channels and distribution for expansion of product into export markets in North America and Asia. The Company is also investing to significantly increase its Cereal and Cereal Snack R&D capabilities to ensure it is leading in developing innovative nutritional solutions in these segments for its customers in Australia, China and SE Asia. An exciting innovation pipeline is in development, with new products in Cereals, Nutritional Snacks and new formats for convenience and food service channels. Ongoing commissioning including installation of automated packaging capability in the 2 nd half, while providing a lower cost base and significant capacity growth, will impact business unit profit performance. Once commissioning is complete, the emphasis will turn towards achieving the targeted production throughput and efficiencies. 27

28 UHT Liquids Non Dairy Activities Non-dairy production volumes increased during the period to support the growth of the Australia s Own and Blue Diamond brands, as well as private label requirements. Non-dairy beverage sales continued the strong upward trend compared to the previous corresponding period, reflecting increased market share of Australia s Own Organic and Blue Diamond Almond Breeze brands within a category which is itself growing significantly. The Company and Blue Diamond Almond Growers are examining the launch of Almond Milk into Asian markets based on the Group s Australian production base. This leverages both the free trade agreements between Australia and Asia as well as the Company s relationship and distribution base within these markets. The Company sees further opportunity to develop non-dairy UHT products from an Australian manufacturing base into China and SE Asia. The Company is investing to significantly increase its UHT R&D capabilities to ensure it is leading in developing innovative UHT solutions in non-dairy and dairy applications for its customers in Australia, China and SE Asia. The 250ml Prisma Format and 330ml Prisma Dreamcap formats at PDG s Shepparton facility will be substantially allocated to PDG dairy based export customers 28

29 Almond Growth in Food Service 29

30 New UHT facility Ingleburn Sydney With increasing demand for additional capacity and product format capability across nondairy and value added dairy categories, the Company is investing for future growth through a planned expansion at a new site in Ingleburn in South West Sydney. The new facility will provide for significant expansion in capacity and efficiency improvements compared to current operations, including providing more efficient and lower cost warehousing and logistics compared to current arrangements. The new facility will provide for existing and new UHT packaging capabilities. This will allow customisation of beverage and food products for local and export markets with efficiency and speed, to meet the growing demand for high quality safe foods from Australia. Construction of a warehousing and distribution facility is expected to commence in the 2 nd half FY 2015, with UHT production commencing from later in

31 Ingleburn UHT Site Construction commencing May 2015 Warehouse and distribution centre by late 2015 UHT operations by late

32 UHT Liquids Dairy Operations (PDG) PDG commenced operations in April 2014 to provide innovative UHT dairy milk capability for customers in domestic and export markets. Commencing volumes are tracking ahead of its 3 year business plan, with strong demand from customers for portion pack and 1 Litre volume from China and SE Asia. These customer requirements are expected to grow beyond their initial volumes as demand for milk increases, with Australian milk products providing the highest quality and safety at a comparative cost advantage compared to locally sourced milk. During the half, the Company delivered sales of approximately $30 million and achievement of profitability during the later months of its first full half. The business is expected to process over 100 million litres in calendar year The Group has established key relationships with major dairy manufacturers and brand owners including Bright Dairy (Shanghai), New Hope Dairy (Chengdu), Shenzhen JLL (Guangzhou), online retailer Yihaodian and a number of regional dairy manufacturers and distributors. Each of these relationships is complementary recognising as a separate strategy the level of diversification in local market distribution, product range and capability within China. 32

33 UHT Liquids Dairy Operations (PDG) To meet expected expansion in milk volumes over the medium term, the Group is evaluating additional processing and filling capacity expansion, including expansion of warehousing and logistics capabilities. Opportunities to vertically integrate into other value added dairy product streams are also being reviewed, consistent with our customer s long term requirements. Detailed planning for and construction of an integrated manufacturing warehouse and distribution facility is expected to commence during With the increasing scale of the PDG and Freedom Foods Group operations, the Group is augmenting management capability within the PDG business including the appointment of senior level commercial and operational resources. With the commencement of operations and significant resourcing to meet the expected ramp up in volumes, the business recorded a net profit loss in the 1 st half FY The Company is planning to consolidate PDG s sales and profit result consistent with the business s increasing profitability and returns. 33

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35 Site Overview 35

36 Australia s Own Partnership into China The Group commenced production during the half of our Australia s Own branded Kids Milk to support its launch in China in early February Australia s Own Kids Milk is being marketed and distributed through a long term 50 year partnership with Guangzhou based Shenzhen JiaLiLe Food Co. Ltd (JLL), which is owned and led by parties associated with the establishment of the largest selling ready to drink beverage in China. The arrangements reflect the strategic approach of our business model to engage established partners in foreign markets whom understand local business requirements. The initial product is a single serve 200ml pack, which is the first Australian milk product marketed specifically to the post-infant-formula toddler market in China. Production commenced in late 2014 sourced from the Company s Sydney UHT facility. Increased capacity at Shepparton during 2015 will provide for long term sourcing from this facility. 36

37 Australia s Own Launch in China 37

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39 Australia s Own Launch in China 39

40 Australia s Own on Shelf in China 40

41 Collaboration with New Hope Group and Perich Group As announced in November 2014 the Company, Perich Group and China s New Hope Group (China s largest private agricultural company) executed a memorandum of understanding to develop and implement growth in long term dairy milk supply through the establishment of new large scale intensive dairy farms in South East Australia for supply to Freedom Foods Group s UHT operations and other processing operations in Australia. The arrangements envisaged will provide a unique collaborative business model to develop large scale dairy farms under Australian management and ownership. New Hope will be a core investor and partner in the operations, while continuing to market and distribute value added dairy products into China through New Hope Dairy. The parties are evaluating a range of options including acquisition to develop further scale in dairy farm operations and greenfield farm development opportunities. It is envisaged that Freedom Foods Group will make a strategic investment in the farm investment vehicle, with the majority of equity funds to be contributed by Perich Group, New Hope and potentially other strategic investors. 41

42 China Representative Office The Group has had a representative in China since Consistent with the growth in our business in China, the Group will establish a China representative office in 2 nd half of FY 2015 to provide for growth in its sales, marketing and supply chain requirements. While this team in China will initially be substantially engaged in supporting the dairy activities, the increased resource will provide a base for increased distribution of a broad range of the Company s products. It is anticipated that this office will also provide representation for alliance brands desiring to access China using the Group s Australia sourced production. 42

43 Specialty Foods Brunswick sardines maintained its No 1 brand leadership position in Australia and New Zealand. The business introduced revitalized packaging and website content for the Brunswick brand. The Company sees further category and product expansion opportunities within the Specialty Seafood category in response to the brand and packaging repositioning. The Paramount Salmon brand performed well during the period, increasing its share of category in its major retail trading partners. Operating performance improved reflecting Company s increased management resourcing and focus on the business. The business continued to utilise the procurement power of Bumble Bee Foods of North America, with Bumble Bee securing 2015 inventory requirements through priority access to salmon and sardine catch volumes. 43

44 New Brunswick Website 44

45 a2 Milk Company Limited (17.8% shareholding) The Company is the largest single shareholder in the A2 Milk Company Limited (a2mc). a2 branded milk is the fastest growing milk brand in the Australian market and the major driver of category growth nationally, accounting for approximately 9.3% of grocery channel market share by value. a2mc also markets a2 Platinum infant formula to consumers in Australia and China. a2mc s plan to enter the North American fresh milk market is progressing, with a launch expected to commence during calendar year a2mc has indicated that it intends to list on the Australian Stock Exchange in March The Company is pleased to have been advised of the improving performance of a2mc and the potential value enhancing opportunities associated with expansion of infant formula and its North American operation. As a result, the Company intends to maintain a strategic shareholding in the medium term, while retaining the option to realise capital from the investment to support growth opportunities. 45

46 USA Range 46

47 3 Pillar Capital Investment Program The Group is now part way through a 3 pillar capital investment programme which will transform its operations over the next 3 years and provide the opportunity to become a leading Australian based Food Company with a strong export platform. Cereal and Snack Production (Allergen Free). The Group has installed world class equipment to increase production capacity significantly for growth in sales and profitability over the next 3 years. Upgraded Cereal and new snack production lines have been commissioned and are ramping up to full efficiency over the next 6 months. The design of the upgrade provides for modular expansion at relatively low capital cost thereafter. Creation of Pactum Dairy Group and the development of a high speed low cost dairy focussed UHT facility at Shepparton. Operations commenced in April 2014 and the business is now profitable on relatively low volumes compared to the rated capacity. Significant expansion of throughput is expected to occur in 2015 as the third and fourth lines become operational. The development of a low cost high speed UHT processing and distribution facility at Ingleburn for non-dairy and dairy products with the potential for other food related products over time. The Group is well placed to capitalise on the capital investment programme from the efforts of the team to bring these plans to fruition. Funding for these major growth programmes will be provided from existing capital, prudent expansion of debt financing and the medium term realisation of other assets. Where equity capital is required, it will be sourced through entitlements offers to all shareholders. 47

48 Realigned Management Structure for Growth Maximise a Strategic all of Company / Category Approach One core focus, not separate business units Managing Director Australasia Cereals, Non Dairy Dairy North America Sales & Marketing Group Brands Operations Quality Finance 48

49 Outlook The Cereal and Cereal Snacks business is expected to deliver improved results from revenue growth through innovation in new products, expansion of distribution channels in Australia and international markets, together with increasing manufacturing efficiencies from volume and cost efficiencies arising from the capital investment program at the Leeton facility. The expansion of UHT capabilities in Sydney commencing in 2016 will result in an increase in sales and profitability, with further growth opportunities in Australia and internationally. The UHT dairy platform in Pactum Dairy Group provides a material opportunity to increase exposure to the growing demand for high quality and safe dairy products from South East Asia, including China aligned with our key strategic customers. The strategic investment in a2 Milk Company provides the Company and its shareholders a potentially significant value creation opportunity. Overall the Company anticipates growth in sales and profits over the remainder of FY 2015, with the benefits of its multi stage capital investment programme delivering materially increased profits and returns from FY 2016 and beyond. 49

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